Tough week for patent giant

The business of suing over patents is getting tougher, as one Orange County patent licensing giant discovered this week.

Facing increased government scrutiny and public criticism, and potentially a more restrictive legal environment, Newport Beach-based “patent assertion entity” Acacia Research reported sharply lower revenue on Thursday. Its stock price dropped more than 20 percent Friday, to $15.50 a share, and is down 32 percent so far this month.

Acacia sues some of the biggest names in technology armed with patents it contends are being infringed. Recent settlement or licensing agreements include those with Google, Samsung and Texas Instruments.

Critics say such outfits – which they call patent trolls – serve as a nuisance at best and a block to innovation at worst.

Acacia blamed its poor financial results on tougher negotiations over the price companies would pay to obtain a license for patented technologies owned by Acacia or its network of subsidiaries and partners. Acacia reported $15.5 million of revenue for the third quarter, compared to $35 million in the same period the year prior. Its net loss widened to $15.7 million, vs. $6.6 million a year earlier. For all of 2012, Acacia had revenue of $251 million.

In an earnings call with analysts, CEO Matthew Vella cited “unprecedented pressures being generated by those who seek to distract, dishearten and dissuade” the people and companies from which Acacia gets its patents.

In explaining the quarter, Vella – who took over the 65-employee company in July from the retiring Paul Ryan – said: “We believed the right move (is) to be simply continuing associated patent litigation until we get better pricing.”

But conditions for patent assertion entities are getting more onerous, not less.

Regulators, courts and lawmakers – including the Federal Trade Commission, the U.S. Supreme Court and Congress – are reexamining the legal justifications and economic impact of legal claims that seek settlements and fees based on patent claims.

UC Irvine patent law expert Dan Burk suggested increased attention to patent law could be emboldening patent defenders. An Acacia opponent might be thinking “’you guys have less leverage than you used to have and you might have less a few months from now,’” he said. “You can certainly see how that might affect negotiations.”

Burk added: “They have a very uphill battle convincing people that they are the good guys. I am sure they believe they are, or that they believe they have a legitimate business model.”

Acacia is showing signs it is trying to fight back.

The company’s plain, sparse website was replaced this week, with more color and deeper explanations of how the company operates. On the new site, Acacia says it has generated gross licensing revenue of $971 million to date and “returned more than $430 million to our patent partners.”

Acacia claims there’s a difference between its modus operandi and the extortion-like tactics of others.

In an interview, Vella suggested a “bad patent troll” threatens a lawsuit that could cost millions to fight in exchange for a couple hundred thousand dollars. “We don’t really do that anymore.”

“Sometimes we’re able to license without litigating, so we’re very happy about that trend. But the reality is that a lot of our revenue still comes in the shadow of litigation,” Vella said. “When that happens it’s not easy for us to explain to people how we do things. Because every time we say something publicly, we lose work product and we lose attorney-client privilege on some of our materials.”

A research note from JPMorgan analyst Paul Coster on Friday said Acacia is making progress on increasing transparency, “but it presently yields somewhat discouraging insights.”

“The acknowledgement of weakness…comes as something of a surprise, suggesting that we haven’t really been given a totally complete picture of the firm’s momentum and execution discipline over the last year,” the note said.

Before the dot-com bubble, Acacia was a tech incubator. Then it changed its business model to seek profits by identifying infringed intellectual property, seeking to license the patents and – when that didn’t work – filing a lawsuit. The company, which now employs lawyers, engineers and business staff, hasn't worked on making new technologies since the 1990s.

Still, Vella suggested Acacia encourages innovation by buying up the intellectual property from failed ventures, offering an exit to investors who can then put the money into startups. While technology giants have advantages of scale, he said, Acacia helps independent inventors and smaller companies that were too early for a market.

"We bring parity back to the playing field," Vella said.

That’s admirable in theory, say some venture capitalists. They bemoan how it works in practice.

“Anyone who helps introduce resources into the startup environment – I encourage that,” said Bob Holmen, managing director at VC firm Miramar Venture Partners. “My preference would be [that the patents end up] in the hands of companies that further innovate.”

This month the Supreme Court said it would take up two cases that could make it easier for patent suit winners to extract legal fees from their opponents. That could make such lawsuits much more costly for firms like Acacia. And last month the Federal Trade Commission said it would seek information from patent assertion companies as part of a Department of Justice look into how the behavior of those companies affects the economy.

Vella said he would welcome “loser pays” legislation or a ruling from the court. He says that would encourage inventors who dread the costs of an unsuccessful suit to turn to Acacia for help in making money off their patents. He also said Acacia is prepared to talk to the FTC if asked.

Gene Quinn, a patent attorney and founder of intellectual property website IPwatchdog.com, agreed that rising pressure may wind up separating more legitimate patent outfits from the industry’s worst offenders. He places Acacia in the former category.

"There are some patent assertion entities that are evil, engage in truly abusive tactics,” Quinn said in an email. "Focus should be placed on those entities."

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